When I hear somebody wanting to invest in real estate, it makes me wonder, is their financial advisor a real estate agent in disguise? Owning a house is one thing, but buying property purely as an investment is quite another. Not only would I have to look after that property, but I’d also have to make do with the relatively low return that real estate, as an asset class, provides.
To compare it with the equity asset class, the BSE Sensex is now at 350 times its value in 40 years, whereas real estate has appreciated between 50 to 100 times during the same period, depending on which part of the country your property is at.
So, naturally, when SEBI introduced regulations around REITs (Real Estate Investment Trusts) in 2014, real estate skeptics remained skeptical. Over the last two years though, this new form of investment is slowly grabbing eye-balls, and funds, from people like you and me!
But really, what is REIT? And why are we talking about it now?
A Real Estate Investment Trust is a company that owns and operates commercial real estate on a large scale. Like a mutual fund, the company pools in money from a number of investors to purchase property. These properties are let out or leased, and the company earns rental income. After deducting managerial expenses, this income is distributed to the investors in the form of a dividend. Over time, investors also benefit from the appreciation in prices of these properties, commonly called, capital appreciation.
In the US, REITs were launched way back in the sixties. In Australia – the seventies. And in South East Asian countries such as Japan, South Korea and Singapore, REITs came onto the scene in the early 2000’s.
Currently, India has only two REITs listed on the Stock Exchange – Embassy Office Parks REIT Ltd., listed in April, 2019, and the more recent, Mindspace Business Parks REIT Ltd. that listed merely two weeks ago.
Picture tech parks and business hubs in cities such as Bangalore, Hyderabad, Pune, Gurgaon, Chennai and Mumbai and you’ll see clusters of office buildings that are home to well-established MNCs like Google, Microsoft, Accenture, JP Morgan, and many more. When you and I invest in, say, Embassy Office Parks REIT, we’re essentially investing in a part of these large office spaces. And we expect a good return on our investment.
Two weeks ago, the Mindspace REIT was oversubscribed 12.96 times. Simply put, the oversubscription proves that Indian investors are confident of REITs doing well in the coming years.
Why such confidence though?
The major drawbacks of investing in traditional real estate are high investment outlays, lack of liquidity, high risk and low returns. The absence of a regulator and in turn, lack of transparency doesn’t help either. REITs overcome these drawbacks. And here’s how.
SEBI governs these companies and has issued rules for the benefit of us investors, the most pertinent ones being,
1. Minimum Investment Amount
One no longer needs huge sums to invest in this sector. SEBI brought down the minimum investment amount from ₹2,00,000 to ₹50,000, in order to make the real estate sector more attractive. Accordingly, the minimum lot size for REITs is now 200 units. That means you’d be buying at least 200 units of either Embassy or Mindspace. And the shares price is currently in the price range of ₹300-400 per unit.
2. Regulations that reduce Risk and increase Transparency
Operation Rules
REITs are required to invest at least 80% of their funds in properties that generate revenue. And 90% of the income earned by them in the form of rent has to compulsorily be distributed to investors as dividend.
Transparency in Valuation
It is mandatory for REITs to value their properties twice a year and update the NAV (net asset value) so that investors know what each unit is truly worth.
In addition to this, you and I can trade units on the stock exchange, making REITs highly liquid. It also exposes us to an asset class we might have otherwise dismissed. Since these companies invest in high-grade properties that promise a good rental yield as well as capital appreciation, the annual return works out to around 7-8%. This is better than an FD or an RD. While dividend is tax-free, any other income we earn on REITs is taxable.
What’s our take on it?
Without giving in to any real estate agent, purely considering the advantages over traditional real estate, I’d say that REITs are a good medium term investment option, if equity and debt are already part of one’s portfolio. And in no case would I recommend investing more than 10% of the total portfolio in this asset class. One could also invest in REITs as a way to accumulate funds to eventually buy your own house.
The REIT market is already quite developed in countries across the globe. Along with REITs listed on the stock exchange, there are also REIT mutual funds, ETFs, and private REITs. Within these, there are sector-specific REITs that invest only in residential properties or commercial properties, data warehouses or hospitals, etc. The Indian market is at a nascent stage and has immense potential to grow.
The reality today is that, India’s office space stands at 650 million square feet. Despite the pandemic, and everybody’s work from home status, owing to tech industry offices in particular, this number is expected to rise to 1 billion square feet in the next 6-8 years. That’s roughly three Pondicherrys becoming five Pondicherrys. With developers like Godrej Properties now constructing eco-spaces, I hope that this sector grows in as environment-friendly a way as possible.
